Guyana, home to the largest offshore oil discoveries of the past few years, faces an exciting year ahead, which will likely shape the future of the South American country’s oil industry, its relations with foreign oil companies, and its competitiveness in the global hunt for low-cost large-volume offshore oil and gas resources.
Over the next year, Guyana is set to hold general elections. It is also set to see the first actual oil production from the first of more than a dozen oil discoveries off its coasts. ExxonMobil, which leads the development of Guyana’s first oil, and other oil companies must take into account current political turmoil, uncertainties over oil royalties for future oil awards, and disputes over maritime borders with Guyana’s neighbors in their present and future operations.
Despite the uncertainties in oil policies and politics, the potential rewards for the foreign oil majors and for the Guyanese government are worth the risk, independent energy analyst and consultant David Blackmon writes for Forbes.
Last year, Guyana was the country with the largest discovered conventional resources, surpassing Russia and the United States, Rystad Energy has estimated, while Exxon, thanks to its Guyana discoveries, led the pack of the world’s top oil explorers.
The little known South American country bordering Venezuela and Brazil has become one of the world’s top hotspots for oil offshore operators in just a few years.
Guyana’s neighbor Venezuela, however, says that drilling activity in parts the offshore waters is illegal because it is in disputed territory. Guyana, and much of the world, views the recent harassment of Norwegian seismic vessels by Venezuelan ships as illegitimate.
Guyana’s oil industry and oil fortunes will also be likely shaped by the upcoming election in the fall of 2019, after the Caribbean Court of Justice (CCJ) had to intervene and ruled last month on a no-confidence motion against the government from December 2018, following months of political impasse.
Then, there is the issue with the oil royalties that Guyana had set before its oil discovery boom began.
Some critics of the way Guyana handled the first oil block leases argue that Guyana sold off its oil riches too cheaply, while analysts say that the terms are definitely favorable for the oil firms.
“The average government take of 60% in Guyana is indeed favorable when compared to other large offshore producers,” Espen Erlingsen, Head of Upstream Research at Rystad Energy, saidin April last year.
“On average, the government take for all offshore projects is around 75%, while rates in major producing countries such as Nigeria, Norway, Mexico, Indonesia and Trinidad are all above 80%,” Erlingsen said.
Guyana prepares to lift government royalties for new oil contracts, after earlier deals had offered handsome shares for the foreign firms that ventured into Guyana’s waters.
Guyana will have to review all royalties for future oil contracts, and expects them to be higher than current rates, Mark Bynoe, director at Guyana’s Department of Energy, told Reuters in early July.
The country aims to hold a new licensing round in 2020 and expects the new licenses that will be awarded to be under the new royalty terms, according to the Guyanese official, who said that the new oil royalty regime would not affect existing contracts.
According to data and analytics company GlobalData, Guyana doesn’t have much wiggle room to boost royalty rates because it risks undermining its competitiveness and losing attractiveness to regional rivals for oil investments such as Brazil and Suriname.
“Under the current contract structure, Guyana may push its royalties up to a 5% rate from the current 2%. Beyond that threshold, it may diminish the attractiveness of the country’s petroleum fiscal framework for investors,” Alessandro Bacci, Upstream Oil and Gas Analyst at GlobalData, said.
“The current attractive framework attracted major oil companies such as ExxonMobil, Total, Tullow, Hess, Repsol and Anadarko, but, if fiscal changes make the regime less competitive, it could limit future exploration,” Bacci noted.
It will be ExxonMobil that will pump the first oil from Guyana’s large offshore oil discoveries— Phase 1 of the Liza development is on schedule for first oil by the first quarter of 2020, with up to 120,000 bpd of production. In May 2019, Exxon gave the green light to the development of Liza Phase 2, after it received government and regulatory approvals. Phase 2 is expected to begin producing up to 220,000 bpd in mid-2022.